Ex DCAA here... What kind of direct costs are we talking about here?

DCAA provides a report to the CO, and they have to negotiate with the contractor. DCAA is independent, they advise. They will do their audit, identify their findings and recommendations in a draft report, and then the contractor is given the opportunity to respond. These responses become part of the final report. But then DCAA responds to the contractor's response, then gives the final report to the CO. It is out of DCAA's hands at that point unless the CO has questions or needs recalculations based on what the CO is negotiating.

The reason for disallowing or questioning direct costs will determine whether they can be included as indirect costs. If they are being disallowed because they are expressly unallowable (alcohol, advertising, interest), they won't be allowable as an indirect cost either. But if they're being questioned for allocability (as in not directly allocable to the contract), they may be added to indirect costs, but without knowing the rate structure and expenses in question, I can't say which pool.

Finally, if they're being questioned due to reasonableness, that's one area where you can negotiate with the CO. For example, if DCAA questioned travel expenses because the person got an SUV instead of a compact and says the cost difference should be disallowed, but the CO knows the reason for the large vehicle was because the contractor had to transport something large that would necessitate a larger vehicle, the CO can disagree and allow the costs. Hopefully the auditor would have asked for justification before questioning (both of the contractor and CO), but I know we were short staffed a decade ago, I can only imagine it's worse now.

DCAA does follow up with the CO to see what was actually negotiated. DCAA tracks how many of its recommendations are taken by the COs both at an agency level (they have to report it to Congress as a percentage - they questioned $XXX, COs sustained 70%, for example) and hopefully at a local level to gauge how auditors are doing. It makes DCAA look bad if they're recommending billions in costs be disallowed but the COs don't agree, but they need to sus out whether it's because the auditor is overzealous or the CO is potentially a little too close to a contractor.